AL-HUSSEINI square in the centre of Nablus is being transformed. The scrawled slogans of the intifada are fading and banks are erecting smart new signs as their branches reopen. Not everyone will be pleased, notably the local money changers who could do without the competition. But for most of the 150,000 residents of the West Bank's largest town, the banks are a tangible sign that investment is coming to the territories.

Viewing these changes from pristine offices overlooking the square is Abdel-Aziz Saymeh, branch manager of Jordan Gulf Bank, the Jordanian bank which reopened its West Bank branch on 25 July. The layout of the offices has changed and computers have replaced cash books but the bank, previously called Intra Bank, has returned to its former premises.

'The people need to profit from investment rather than keeping money under the mattress or pillow,' says Saymeh. He wants to get money moving again, by providing basic bank services for individuals and loans for businesses. The banks can also act as a conduit for donor funds, he says. But for Saymeh, returning with his family to his home town, there is also a sense of duty. 'Our main objective here is not only profit but also to have a national role in the reconstruction effort.'

Jordan Gulf is one of six Jordanian banks licensed by the Central Bank of Jordan to open branches in the West Bank and Gaza. The banks also require approval from Bank of Israel (central bank). This will be the case as long as the Jordanian dinar and Israel's new shekel are both legal tender in the territories.

According to the economic agreements with Jordan and Israel, the banks also need approval from the Palestine National Authority. It has yet to set up its own regulatory body, the Palestinian Monetary Authority. The delay has left many bankers frustrated as they try to feel their way through the obscure financial arrangements for the area.

Huge risks

In April, Palestinian officials were already complaining that the failure to create a monetary authority had prevented the Palestinians from controlling the development of banking operations in Gaza and the West Bank. 'The risk of operating there is huge,' says Maher Shukri, managing director of Amman Bank for Investment, which has a correspondent agreement with the Bank of Palestine. 'The regulations are clear but they are a headache,' he says.

Plans have proceeded regardless, however. Next door to Saymeh's office, Arab Bank is renovating its first branch; another is planned in Gaza. Arab Bank senior manager Tewfik al-Khalil says that the bank wants to have 25 branches operating within two years. Bank of Jordan's first branch opened on the other side of Al-Husseini square in June, a month after it began operations in Ramallah. The other Jordan-based banks planning to open are Jordan National Bank, in Nablus, ANZ Grindlays in Ramallah and Arab Land Bank in Bethlehem and Gaza. British Bank of the Middle East, which had a branch in Jerusalem before 1967, is also planning to open a representative office in either Jericho or Ramallah.

In addition to the Jordanian banks, there are several Palestinian institutions in the pipeline. At the head of the list is the Ramallah-based Commercial Bank of Palestine, which opened for business on 18 August. International Palestine Bank, the creation of Spanish, Moroccan, Israeli and Palestinian investors, is seeking a licence from the Bank of Israel. The National Palestinian-Egyptian Bank for Development, a new institution planned by a Cairo-based Palestinian businessman, has initial approval from the Palestinian leadership. A group of Palestinian shareholders in Arab Jordan Investment Bank has registered the separate Palestine Investment Bank in Gaza and a similar group led by the Jordan Investment & Finance Bank has applied to the Palestine National Authority to set up the Jerusalem Bank for Investment & Development. Also mooted are plans for a housing bank, an Islamic bank and an institution calling itself Palestinian Family Bank.

All this is far cry from the days of the intifada when the Israeli banks operating in the territories closed down, with the exception of two branches of Bank Leumi. This left only the Bank of Palestine operating in Gaza and Jordan's Cairo Amman Bank, which opened on the West Bank in 1987.

Business conditions were bad and bank activity was at a very low level. Cash dominated the depressed economy and little credit was advanced to local industry. The credit that was available did not come through conventional banks. The UN Relief & Works Agency for Palestine Refugees in the Near East offered loans of between $2,000-70,000 to small and medium sized businesses from a $3.2 million revolving fund.

The Economic Development Group, which is backed by the EU, has been another source of funds. It now has a loan portfolio of about $10 million and offers loans of between $2,000 to $150,000. The Technology Development Corporation has a smaller loan portfolio but offers larger loans of up to $500,000. The Arab Development & Credit Corporation, the oldest of the three agencies, has a loan portfolio worth about $7-8 million supporting the agriculture sector. These institutions are now hoping to merge to form a Palestinian development bank.

Companies looking for loans cannot expect any immediate improvements, despite the rush of banking activity. All the banks face tight restrictions on lending imposed by the Israeli authorities. The new Palestinian banks will have to build up reserves before they are able to offer credit facilities.

'We will be following a conservative policy in extending credit, we can't afford to be too aggressive,' says Khalid Shair, general manager of Commercial Bank of Palestine. But he remains confident that the changes will not be long in coming. 'Once there is autonomy in the rest of the West Bank, then it will be a different story,' he says.

Even this is too optimistic for some. Credit manager at Cairo Amman Bank, Hashem Anwar Khatib, says most bankers will find the market far smaller than they expected, and the area could find itself 'overbanked overnight'.

In 1992, total advances reached only $15 million. The World Bank estimates that the Palestinian economy has gross national product of just under $3,000 million. Khatib believes that total advances could reach $100 million once the appropriate institutions are in place. That day is some way off, however. The occupation and the intifada crippled local industry - the sector with the best potential for bank lending - and it only accounts for 10 per cent of national output.

Such a small market is likely to be able to support only half a dozen banks at most, Khatib says. 'The market will be saturated. Five to 10 years from now some of the banks will have to shut their branches,' he says. He suspects that some of the planned banks may never actually see the light of day.

With so little potential for industrial investment, banks may be encouraged to seek profits in real estate. But Khatib warns against over-estimating the value of the market. 'I believe banks will find a problem in real estate mortgages, because prices are over-inflated,' he says.

There are also some basic technical difficulties which need to be addressed. At present, letters of credit can only be opened through an Israeli bank, which adds to costs for the local banks. Foreign exchange transactions are still governed by Israeli laws which place limits on the repatriation of capital by investors from outside the territories.

But, the banks are an invaluable conduit for donor funds. Cairo Amman is offering loans to local firms covering 65 per cent of the cost of imports from France, with the other 35 per cent in the form of a grant from the French government. France has put up FF 20 million ($3.7 million) to support the scheme. Khatib says the Swiss government is considering a similar proposition.

It is a small beginning and it may not live up to the bankers' expectations. But to the people of Nablus at least, the influx of financial institutions is a heartening sign that times are finally changing.